Economic Issues in Generation
James Peters, Economic Analyst
Electric Reliability Division, Generation & Certificate of Need Section
Michigan Public Service Commission
July 1, 2010 – 10:30 pm
1
Discussion Overview
I. Regulatory Context
II. Defining long-run marginal cost
III. Identifying components of long-run
marginal cost of coal-fired power
2
I.
Regulatory Context:
In what kind of regulatory processes,
public/private collaborative efforts does the
MPSC consider long-run cost of electricity?
3
• The most recent resource planning process the MPSC has been
engaged in began in 2004 with Commission Order U-14321 which
created the Capacity Need Forum (CNF)
• While the CNF report was completed in January 2006, Governor
Granholm issued Executive Directive 2006-2 calling for development
of an updated plan for meeting the state’s future electricity needs.
•
The 21st Century Energy Plan (CEP) was complete by January,
2007.
• In both the CNF and the 21st CEP processes, the MPSC served as a
central point of stakeholder coordination and modeling efforts.
• Neither process represented a contested administrative hearing
culminating in a binding “final order” by the Commissioners.
4
2008 Public Acts 295 & 286 and the Certificate of
Need Process
• The ~ 3 yr resource planning effort led by the MPSC
culminated in November 2008 passage of Public Acts
295 & 286 which modified current law to propagate the
policies and generation expansion plans identified in the
CNF & 21st CEP.
• P.A. 286 identified and described a new regulatory
process, Certificate of Need, by which the MPSC would
review, analyze and recommend a regulated utility’s
generation expansion plan → the MPSC now considers
the long-run cost of electricity within a legally-binding
framework.
5
2009 E.D – Electric Generation Alternatives
Analysis
• On February 3, 2009, Governor Jennifer M. Granholm issued
Executive Directive (E.D.) 2009-02 directing the Michigan
Department of Environmental Quality (DEQ) to “determine
whether there are feasible and prudent alternatives consistent
with the reasonable requirements of the public health, safety,
and welfare that would better protect the air, water, and other
natural resources of this state from pollution than the
proposed coal-fired electricity generating plant before issuing
a permit to install for the construction of the proposed facility.”
• E.D. 2009-02 requires the Michigan Public Service
Commission (MPSC) to provide technical assistance to the
DEQ in making determinations required under the Directive.
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II. Defining Long-Run Marginal
Costs
Is there really a difference between long run
marginal costs and long average total costs?
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Production Cost Curves and Equilibrium Market
Prices in Theoretical Competitive and Monopolistic
Markets
120
100
ATC
Monopoly Price
and Quantity
$
80
MC
Supply –
Offer Curve
60
Demand
40
20
Marginal Revenue
Competitive Price
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
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Real World Electricity Market Supply – Offer
Curves
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• In the short run, power suppliers’ market offers
do not necessarily reflect the price needed to
recover total volumetric costs.
• Offers can just reflect fuel and variable O&M
• Offers can be even be negative which reflect the
opportunity cost of foregone sales between the
shut-down and start-up times
• In the long run, average total cost of generation
will be the minimum offer
10
Coal Plant Market Revenues and
Profitability
• Most traditional baseload generation generally offers
power into market at pure marginal cost of operation.
• The difference between the price the generator receives
and the marginal cost offer must be sufficient to, on
average, cover all fixed costs.
• Critical drivers of market price include:
- available “local” capacity + imported capacity
via transmission relative to demand
- natural gas prices
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Estimated Costs and Market Revenues of Coal
Plant New Entrants – 2009 PJM SOM
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• CP design :
- western Virginia sub-critical steam
- selective catalytic reduction system (SCR)
for NOx control
- flue gas desulphurization (FGD) system with
chemical injection for SOx
- mercury control
- baghouse for particulate control
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Economic Dispatch Assumptions:
-Accounts for effects of hourly
local air ambient temperatures
on plant heat rates
- Unit is dispatched when
market price > variable
operating costs
-Unit availability adjusted for
forced outage rates
- Real-time, Day-Ahead,
Capacity & Ancillary Services
Market Revenues
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In the long run, marginal costs of coal-fired
power generation will equal or exceed
those of its average total cost……
The question becomes, “What will the
long-run average total cost of coal-fired
power generation be?”
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III. Identifying Long-Run
Components of
Coal-Fired Power
Average Total Cost
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CMS: ASPSC Cost Estimates
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Assumptions & Average Total Costs/MWh
ATC
K
Fuel
CO2
2010
$80
$51
$18
$0
2020
$109
$43
$26
$28
2030
$130
$42
$28
$48
2040
$156
$34
$30
$82
~2050
$195
$30
$31
$124
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• The principal drivers of long-run cost of
coal-fired power will be:
- integration of negative externalities into market
prices
- the rate of technological development of
alternative sources of renewable power in the
forms of both commercial and distributed
generation
- the rate of energy efficiency growth
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Environmental Costs of Coal-Fired
Power
2009 TVA Coal-Ash Spill
Mountain-top Coal Mining
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Global Warming ????
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Questions & Answers
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